Dream Insider Informant Led FBI From Galleon to SAC

Elyse Slaine attends "The Millionaire Matchmaker" season finale viewing party in New York on Jan. 11, 2011. Photographer: Steve Mack/WireImage

Dec. 3 (Bloomberg) -- David Slaine had a secret for the FBI
that summer day, one of scores he would eventually reveal in his
role as a dream informant. The subject was Teterboro Airport.
Slaine claimed a money manager he knew was using it to profit
quietly on trades of health-care stocks.

Slaine, a former Morgan Stanley managing director and ex-partner at the Galleon Group LLC hedge fund, said the trader
paid off people to find out who used the small New Jersey
airport, located close to many of the world’s biggest drug
companies.

The bribed tipsters were watching for bankers who “were
coming in and out of Teterboro Airport,” agent David Makol
wrote in a summary of Slaine’s Aug. 18, 2007, conversation with
the Federal Bureau of Investigation, one of more than 200 they
had with him. “All the major players involved in the
pharmaceutical industry would come in and out of that airport.”

During the U.S. crackdown on insider trading over the past
five years, Slaine, 53, became a tip-mining machine as he worked
undercover, often wired for sound under FBI orders, from mid-2007 until at least June 2009.

The government’s most productive informant in a broad
investigation of Wall Street insider trading, he was also among
the first to cooperate. His work led directly to the conviction
of 12 people and indirectly to a half-dozen more. His leads
helped prosecutors win judicial permission to wiretap the mobile
phone of Galleon Group co-founder Raj Rajaratnam, who was later
convicted.

‘Extraordinary’ Cooperation

U.S. agents used evidence he gathered to build cases
leading to executives at expert-networking firm Primary Global
Research LLC. He passed information about Steven A. Cohen’s SAC
Capital Advisors LP, and he took the witness stand to tell
jurors about secret recordings he made of traders now in prison.

“Slaine’s cooperation has been nothing short of
extraordinary,” Assistant U.S. Attorneys Andrew Fish and Reed
Brodsky wrote in court papers before Slaine was sentenced this
year for his own illegal trade. “Slaine’s cooperation was one
of the key factors that led to a series of successful
investigations and prosecutions.”

His testimony was “credible and consistent,” Fish said in
court.

An examination of Slaine’s work with the FBI, based on
hundreds of documents never before revealed, shows how the
bureau turned Slaine, how his cooperation deepened, how his
information created a domino effect of new investigations and
new informants, and how the case took a personal toll on Slaine.
The FBI reports also offer a glimpse of how, in the words of
Slaine’s friend Robert Sager, the “multiyear experience” of
cooperating with the FBI was so “tremendously traumatic.”

Goldman Sachs

At one point, a year into his cooperation, Slaine’s wife
came up with a plan to extract him from the FBI’s grip. It
didn’t work.

Slaine gave the agency an insider’s view of Wall Street
from the vantage of one of its more successful operators,
relaying rumors (“Raj liked the pretty girls”), pointing out
market peculiarities (unusual activity in Goldman Sachs Group
Inc. stock) and recounting instances where others used illicit
information to trade shares.

The reports, which summarize Slaine’s information, show how
common insider trading had become on Wall Street, with illicit
tips passed along as part of friendly chatter at Equinox health
clubs, on Manhattan street corners and at everyday eateries
familiar to New Yorkers such as Burger Heaven and Pret A Manger.

Astonished

In an unrelated case brought this month by the Justice
Department and the U.S. Securities and Exchange Commission, the
FBI said one alleged accomplice in an insider-trading ring
involving health-care stocks told another: “At the end of the
day, the SEC’s got to pick their battle because they have a
limited number of people and a huge number of investors to go
after.”

That smug sentiment is one reason so many insider traders
are astonished when confronted by the FBI.

One informant, who asked not to be identified because he is
on probation, said that when the FBI first approached him about
his illegal trading, they sat him down and showed him an
elaborate flow chart of suspects. The display had photographs
with large circles around major FBI targets and smaller circles
around lesser ones, including him. Agents told him it would be a
shame to go to prison for being a small circle. Terrified and
feeling powerless, he said, he chose to cooperate.

Hanged Himself

That path, however, can take a devastating toll of its own.
In one case related to Galleon, Ephraim Karpel agreed to
cooperate with prosecutors in 2008. For more than a year, he
taped fellow traders. Last year, two days after jurors at a
trial of three traders heard him in a wiretapped conversation,
Karpel, who was never charged, hanged himself in his Fifth
Avenue office. He was 50.

“Week after week, month after month and eventually year
after year, David’s involvement with the FBI caused incredible
strain on his ability to sleep, eat and communicate with the
people he loved,” Slaine’s friend Sager wrote in a letter to
Slaine’s sentencing judge.

FBI spokesman Jim Margolin said in a statement: “If there
is a suggestion that the FBI exerts undue pressure on people or
puts them in uncomfortable situations by seeking their
cooperation, I think it’s important to remember whose actions
created the uncomfortable situation.”

“We’re talking about people who’ve broken the law,” he
said. “When agents approach a prospective cooperator and
confront him with the crimes he’s committed, they’re hoping to
gain his cooperation to assist the investigation, but they’re
also offering that person an opportunity.”

Poor Background

Slaine was first confronted by the FBI about insider
trading in June 2007 after it had investigated leaks of ratings
changes by UBS Securities. He is a burly man with salt-and-pepper hair who retains his Boston accent. He grew up poor in a
working-class neighborhood in Malden, Massachusetts. A star
shooting guard on his high school basketball team, he went to
Clark University in Worcester, Massachusetts, and began trading
stocks after earning a bachelor’s degree in 1982. Before landing
at Morgan Stanley in 1986, he worked at Smith Barney Harris
Upham & Co., as well as Troster Singer Stevens Rothchild,
according to regulatory records.

Within three years, Slaine was running the over-the-counter
desk. Last year, Slaine told the jury at the insider trading
trial of Zvi Goffer, Goffer’s brother and another trader -- a
case in which Slaine gathered critical information -- that he
earned tens of millions of dollars trading stocks in his career.

Tough Guy

“He was a tough, no-nonsense guy,'' Timothy Caffrey, a
former Morgan Stanley managing director who worked for him, told
Slaine’s sentencing judge. “He was demanding. He had an
extremely high bar set for himself and expected those who worked
with him to have the same.” Slaine rose to become a managing
director overseeing Nasdaq trading and risk.

Slaine left Morgan Stanley in January 1998 and joined
Rajaratnam’s fledgling hedge fund, Galleon Group, which then
managed $300 million. He oversaw a portfolio of health-care and
technology stocks, Slaine said at the Goffers’ trial.

Partner Slapped

Slaine told the FBI he left Galleon in January 2001 after
learning that Rajaratnam had bet against Nortel Networks Corp.
based on inside information. He said he had a confrontation with
Rajaratnam’s partner, Gary Rosenbach, and ended up slapping him,
according to an FBI report.

“Throughout my career, I refused to work for certain firms
knowing it was how they got their ‘edge,’” Slaine wrote in a
letter to his sentencing judge. “I am not, nor have I ever been
a man driven by greed.”

Doug Koff, a lawyer for Rosenbach, and Benjamin Harris, a
spokesman for Rajaratnam, declined to comment.

Slaine, who for more than a decade has volunteered at a
charity for needy Bronx residents, took a job as head trader at
Chelsey Capital, a Manhattan hedge fund. In early 2002, an
analyst named Erik Franklin rejoined Chelsey. Franklin arrived
with a secret: A longtime friend, who was a member of the
investment review committee at UBS Securities, had agreed to
repay a $25,000 loan by tipping Franklin to UBS ratings changes
before the firm made them public. The tips generated $2 million
in profit on insider trades for Chelsey, according to court
papers. At his guilty plea in 2009, Slaine admitted he used an
illegal tip as well. He made $532,287.

One Trade

It was the only time Slaine traded on illegal information,
prosecutor Fish later told a judge.

“It was just one trade,” Slaine’s ex-wife, Elyse Slaine,
said in an interview.

Aided by Franklin, prosecutors on March 1, 2007, announced
charges against 13 people over the UBS tips and other leaks.
While Slaine wasn’t arrested, Franklin and another Chelsey
trader pointed the government toward him. By June, two FBI
squads were investigating insider trading, with one joining an
SEC probe of Rajaratnam and one pursuing other leads.

“They wanted to talk about insider trading,” Slaine said
at the Goffers’ trial.

Slaine, who declined to comment for this story, didn’t
testify about what happened next. Sager, who said he spoke to
Slaine often about his cooperation, said that once Slaine made a
commitment to the FBI, he saw it through.

SAC Capital

“Of course, part of David’s involvement with the FBI was
motivated by his hope that his efforts would be considered in
determining his formal punishment, but it was also very much a
way for him to show” his family that he “cared about doing the
right thing,” Sager told Slaine’s judge.

On June 12, 2007, Slaine spoke to the FBI for the first
time, according to agency reports. He fielded questions about
traders at four firms, according to an FBI report from that day:
Chelsey, Galleon, Schottenfeld Group LLC and Cohen’s SAC Capital
Advisors. Citing information he got from former colleagues, he
said a woman he named “had faxed a report to Steve Cohen’s
office prior to the downgrade of the stock Amazon,” the FBI
report said. He identified his ex-colleagues by name.

Neither of his former colleagues has been charged with
wrongdoing, and both declined to comment. The SEC had previously
investigated the Amazon allegations and not brought a case.

Coming Clean

Clearly intrigued, prosecutors reached a deal with Slaine
in July 2007 in which he agreed to gather evidence secretly in
hopes of winning their support for leniency at sentencing. On
July 25, Slaine came clean. After outlining his career for the
agents, he told them more about traders who’d been at SAC,
Schottenfeld and Galleon, where his workout partner and friend
Craig Drimal had worked, according to the FBI report.

The FBI raised Drimal’s name and asked about a suspicious
trade in ATI Technologies Inc. Slaine said he gave Drimal
permission to make the ATI trade through Slaine’s account. If
the trade paid off, Drimal said he would repay a $20,000 loan he
owed Slaine with the profit, according to the report.

Jonathan Gasthalter, a spokesman for SAC, declined to
comment. Cohen has not been accused of wrongdoing. Others
previously associated with SAC have been charged, including Jon
Horvath, a former technology analyst who pleaded guilty and is
cooperating with prosecutors; Noah Freeman, an ex-portfolio
manager who pleaded guilty and is cooperating; and Donald
Longueuil, a former portfolio manager who is serving a 30-month
term.

SAC’s Martoma

Mathew Martoma, a former portfolio manager for SAC unit CR
Intrinsic Investors, was arrested Nov. 20 in what prosecutors
said was a record-setting insider case. The fund netted $276
million trading on a tip about a clinical drug trial, they said.

Beginning on July 25, 2007, Slaine gave the agents details
of Drimal’s family life, describing him “as looking like Bruce
Willis and being soft-spoken,” according to a report from July
30. He reviewed Drimal’s ties to Galleon, named another trader
who “always has information” and mentioned others who worked
with Rajaratnam. Agents hadn’t yet approached other Galleon
cooperators.

The agents’ questions weren’t all about stocks. “Raj
(Rajaratnam) loves the strip clubs,” the agents wrote in
summary of Slaine’s comments. “Raj plays one person against the
other but he does keep his word with paying up his debts.”

New Territory

From July 27 to Aug. 7, the agents spoke to Slaine seven
times as the debriefings moved into new territory, including his
ex-colleagues at Morgan Stanley. Slaine, who had started his own
firm in 2006, continued to tell agents about Drimal and other
traders. He flagged suspicious trades in Kos Pharmaceuticals
Inc., Medimmune LLC and other companies.

On Aug. 14, after running into the fund manager with the
purported Teterboro ties as he was leaving Bloomingdale’s,
Slaine told the agents the fund manager claimed to have a source
on the board of directors of a medical company considering a
takeover. Slaine named the fund manager and said “he is no
longer with his wife and that women are ‘all over him,’”
according to the report.

The fund manager was never charged. In an interview, he
called Slaine’s account of the Teterboro payoffs, which didn’t
identify the tipsters, “ridiculous.” He said he’s happily
married and didn’t have sources on a medical company’s board.

Instant Message

By then, Slaine had begun gathering evidence for the FBI as
well as passing along information. On Aug. 8, he gave the FBI an
instant-message exchange he had with a fund’s principal. The
same day, he tried to record his first telephone call. The
target was Drimal.

“I just do what they ask me to do,” Slaine testified at
the Goffers’ trial about his actions as a cooperator.

Slaine began recording calls with Drimal and others on
almost a daily basis. On Aug. 21, for the first time, the FBI
had him record a meeting at a fund manager’s office. It turned
out that Slaine was skilled at getting people to “incriminate
themselves,” Fish, the prosecutor, later told his sentencing
judge.

“I would set up a meeting, and I would go to see the FBI,
and they would give me a device,” Slaine testified at the
Goffers’ trial. “I would go to the meeting. I would record the
meeting, leave the premises, go back to the FBI and give them
the device.”

It isn’t clear how Slaine wore the recording device. In
another case, the informant hid it as part of a baseball cap,
according to a person closely involved in the case.

Burger Heaven

With Drimal an FBI target, Slaine met him on Sept. 4 at a
Burger Heaven restaurant on 54th Street in Manhattan while
wearing a recording device. There, Drimal gave him a slip of
paper with four stock symbols that had been passed along by
Drimal’s source.

“He told me those four stocks were in play,” Slaine
testified. Drimal told Slaine to destroy the paper.

“I gave it to the FBI,” Slaine testified.

In a Sept. 20 conversation, Drimal told Slaine that Zvi
Goffer was getting tips from lawyers.

“I know who the law firm is,” Drimal said in a
conversation Slaine recorded and which was entered into evidence
in the Goffers’ trial.

“Which law firm is it?” Slaine asked.

“Ropeson,” Drimal replied, a reference, it turned out, to
the Ropes & Gray LLP law firm. Jurors later convicted Zvi
Goffer, his brother and a colleague of trading on tips from two
lawyers at the Boston-based firm, who were convicted and sent to
prison. Tim Larimer, a Ropes & Gray spokesman, declined to
comment.

Fuller Reports

By then, Slaine was giving fuller reports, thick with
information both relevant and gossipy. He was working hard to
draw people out and mentioned a trader nicknamed “Shakes,” who
worked at Schottenfeld.

“We call him ’Shakes,’ because he gets nervous; he
literally shakes he’s so nervous about the whole thing,” Drimal
told Slaine, according to an FBI report summarizing a recorded
call. It was a reference to Gautham Shankar, who later pleaded
guilty to insider trading, cooperated with prosecutors and got
probation. Drimal added, “When Shakes has something, you play
it big.”

Over the next year, Slaine recorded the fund manager with
the purported Teterboro connections, wore a wire in a meeting
with another money manager who wanted to hire him, and taped
analysts, traders and Zvi Goffer, according to FBI reports.

Wiretap Help

As the months went by, he related details about several
traders who eventually cooperated in the U.S. probe. Prosecutors
cited evidence Slaine gathered in requesting a judge’s approval
to wiretap the phones of Goffer and Drimal. They referred to
recordings of Drimal and Goffer in seeking approval to wiretap
Rajaratnam’s phone, according to court records.

Alexander Dudelson, a lawyer for Goffer, declined to
comment.

To outsiders, Slaine appeared as his regular-guy self.
“Normal -- you wouldn’t have thought anything,” his friend
Stephen Temes said in an interview. The subterfuge was taking a
toll, however.

Soon after Labor Day in 2008, more than a year after he
began cooperating, Slaine told agents he was “having serious
marital issues” and thought his wife might compromise the
investigation. According to a report of their Sept. 4
conversation, Slaine said he had “serious concerns” that his
wife would call Drimal to alert him to his cooperation. He
didn’t think his wife had Drimal’s mobile phone number, he
added.

Fake Plan

Today, Elyse Slaine, now his ex-wife, said she never really
intended to call Drimal and had no intention of harming her
husband.

“I just thought it would make the FBI leave David alone,”
she said. “The whole thing was devastating, and I just wanted
it to stop.”

It didn’t.

“Nobody wants to hurt other people,” said Elyse Slaine,
who separated from her then-husband in 2004. The two briefly
sought to reconcile in 2007 before getting divorced in 2010.
“While David wanted to do the right thing, it also tore him
apart.”

Slaine’s cooperation pushed others into the government’s
arms. Five people in the Goffer case pleaded guilty and worked
with prosecutors. Four people pleaded guilty, didn’t cooperate
and went to prison. Three were convicted at a trial and are
behind bars.

Franz Tudor

Along with Shankar, one of the new cooperators was Franz
Tudor, a health-care trader who told agents about leaks he gave
to Anthony Scolaro, then a portfolio manager for Diamondback
Capital Management LLC, according to court papers. Scolaro’s
subsequent cooperation -- including FBI debriefings and 43
recorded calls he made -- helped the government secure a search
warrant for Diamondback’s offices in Stamford, Connecticut.
Scolaro pleaded guilty and got probation. Diamondback paid $9
million to resolve a U.S. investigation.

“Slaine’s cooperation led to the approach of other
individuals who in turn cooperated with the government,”
prosecutors wrote. One of them “led the government” to Karl
Motey, whose own work helped the U.S. begin an insider probe of
the Primary Global firm. More than a dozen others associated
with that firm have been convicted. Motey pleaded guilty. His
lawyer, Alexandra Shapiro, declined to comment.

Unique Cooperation

“What was so unique about Mr. Slaine’s cooperation -- he
basically uncovered a crime in progress and allowed us to do
this wiretap investigation,” Fish told the judge at Slaine’s
sentencing. Ellen Davis, a spokeswoman for U.S. Attorney Preet
Bharara in New York, declined to comment for this story.

While Slaine’s day-to-day involvement with the FBI tapered
off by fall 2008, he still passed along the occasional tip.
Agent Makol wrote on Sept. 24, 2008, that Slaine advised that
the government “needs to investigate the stock price spike of
Goldman Sachs (Goldman Sachs Group Inc.) that occurred at the
end of the trading day on Sept. 23, 2008, prior to the public
announcement that Warren Buffett was investing in Goldman
Sachs.”

Rajat Gupta

Former Goldman Sachs director Rajat Gupta was sentenced in
October to two years in prison for tipping Rajaratnam to
Buffett’s $5 billion investment in the firm. It’s unclear if
Slaine’s tip contributed to Gupta’s prosecution. Gupta’s lawyer,
Gary Naftalis, and Goldman Sachs spokesman Michael DuVally
declined to comment.

FBI records in Slaine’s case show agents in October 2008
fielding information about an alleged tipster known only by his
nickname. During a discussion of a pharmaceutical company, the
tipster “showed everyone approximately $10,000 to $20,000 in
cash and said this is how I get to talk to people,” according
to one FBI report.

The tipster shows up in FBI files of another case, in which
he tells a trader to try on his leather coat and put his hand in
his left pocket. The trader “pulled out a stack of cash,” the
FBI report said. “This was how he got people to talk,” the
tipster said.

The alleged tipster was never charged.

Drimal

On Oct. 16, 2009, the FBI arrested Rajaratnam and five
others. Drimal, Goffer and 12 others were charged on Nov. 5.
Four days before Drimal’s arrest, FBI agents approached him and
asked if he’d wear on a wire on others -- including Slaine,
according to Drimal’s wife, Arlene Villamia-Drimal, a lawyer who
represents her husband. Drimal refused, she said.

The Wall Street Journal, citing unidentified persons, named
Slaine as a cooperator on Jan. 16, 2010, and detailed some of
his meetings with Drimal and Goffer.

“He was crushed,” Arlene Villamia-Drimal said of her
husband. “He believed David was his friend.”

Over the ensuing months, Fish said, Slaine spent hours
listening to wiretap recordings, reviewing transcripts,
explaining the industry and meeting with prosecutors. In May
2011 he testified at the Goffers’ trial. By then, Drimal had
pleaded guilty. He was sentenced to 66 months in prison. Zvi
Goffer got 10 years. Rajaratnam got 11 years after his
conviction at a trial in 2011.

Slaine’s Sentence

Slaine appeared in Manhattan federal court for his
sentencing on Jan. 20. He apologized to his family. U.S.
District Judge Richard Sullivan called him “a good person” who
had committed a “serious crime” and sought to make amends by
cooperating. He sentenced Slaine to three years’ probation and
300 hours of community service. He imposed a $500,000 fine and
forfeiture of $532,287, the amount of his illegal profit. Slaine
separately paid the SEC an additional $304,098.

Like most Galleon cooperators, he never spent a day in
prison. Nevertheless, his ex-wife said, his life was forever
altered.

“Why can the government pick and choose whose lives they
can destroy?” she said.

As he awaits the end of his probation, Slaine today works
with disadvantaged youth in a basketball league and does other
volunteer work.

“He comes from humble beginnings,” said Jonathan
Schindler, who operates a Manhattan program preparing food for
needy Bronx residents, where Slaine volunteers. “It comes from
a desire to help people.”

Slaine also works at a new venture far from the rat race of
Wall Street. He is a partner in a small New York chain that
trains and grooms dogs. It’s called Spot.